China; It�s their turn to eat

Richard Moleofe | Friday May 22, 2015 15:49

The issue at hand now is the creation of the new international financial institution, the Asian Infrastructure Investment Bank.

It seems a lot of odds are playing against the US in this entire scenario. The bank itself is a threat to the old existing Breton Woods institutions in the names of the World Bank and the International Monetary Fund. These two institutions have in the past determined the world’s heart beat in as far as global economy is concerned and the US literally owns them.

The reason why China is raising a financial institution which in the eyes of the US is viewed as renegade is because the Chinese have identified a niche gap in the way the world economy runs and they are so ready to tap into this great opportunity. All other countries that matter in the world economy have subscribed to the new financial institution and it is only the US and Japan who have not shown any interest.

They always say do not judge a book by its cover, but some come with tittles that really catch our attention. Such one book is “It’s our Turn to Eat” by Michela Wrong from Kenya, a book that set the right parameters of whistle blowing. Indeed it is China’s turn to eat in as far as what their new bank offers the world. In my honest opinion, this is the end of the world economy as we know it now.

The Chinese need to tell the rest of us how they have successfully managed to create their current economy against all odds of capitalism. China has created her own form of capitalism and I want to believe that even Karl Marx would marvel at this creation. From a political stand point they are clearly communist and yet from an economic platform they are as capitalist as it may demand.

Westerners are often frustrated whenever they are outsmarted by any third world country such as China. But this time around the Americans have no choice regarding the new international bank. The best strategy that the Americans should adopt is to become part of the establishment if they so desire to out manoeuvre their Chinese counterparts. If they can not beat them, then they should join them. If the US does not salvage its economic dominance by becoming a part of AIIB, then they stand to lose everything in the long run.

Last week I made reference to the comments made by the current World Bank President, Jim Yong Kim in which he pledged to cooperate with AIIB. I found that to be very surprising when taking into account the fact that he has been appointed to that position by Barak Obama, the US president. He is literally de campaigning his current employer. With those utterances I would consider Kim to be a front runner for the executive position in the new bank. In my opinion China needs Kim much more than Kim would need China. He would bring on board an immeasurable amount of experience in the way such complex institutions are run. And not only that, he would help China to avoid the pitfalls that come with such an investment which is unparalleled and unprecedented.

The arrival of Kim at AIIB would help propel the bank in its right course of poverty eradication. And what is Kim’s history of poverty eradication? This fellow has been involved with several initiatives that have to deal with health and justice. He particularly has been keen in raising alarm bells around issues of health and its relationship with poverty. He championed a project called Dying for Growth which is a book that attempts to address issues of global inequality and the health of the poor (ISBN 1-56751-160-0). In fact he is the leading editor of the book and among others are the likes of Alec Irwin. Kim is no stranger in the fight against poverty. Last week on this column I was arguing that China could use AIIB to fight global poverty and this is why I am making the Kim connection in my current argument.

The biggest question that many are asking is how China will avoid failure on AIIB. Of course those holding interests on the current existing international financial institutions will not just fold their arms and watch China expand in this field. They will use underhand tactics to topple the AIIB.

AIIB could not come at the worst time for US interests. The US holds very little leverage in manipulating China’s interests because of two major reasons, one of which I have already discussed here. It is the fact that the US is not a part of the AIIB and the second reason is the fact that of late China has become the major US debt holder.

This week when I saw the caption on Cable Network News (CNN), “China retakes spot as biggest holder of US debt”, I knew the Chinese had moved up for a clear reason. China needs this position in order to take AIIB to where they desire it to be. The US has literally mortgaged the future of their country and this is for generations to come. Otherwise this project would be destined to fail before its commencement.

It is not by accident that China has moved up in holding a majority of US debt. This has been factored into the creation of the AIIB. This bank will like the World Bank and the International Monetary Fund use the US dollar for all its transactions. Hence the need for China to purchase sufficient US Treasury bonds in order to stabilise the AIIB. Similarly, the AIIB will use the US dollar for trading and therefore China needs to have a good grip on America’s economy by way of holding a significant part of their debt. This is a good move for the Chinese and it also gives other investors some level of certainty and will want to increase their levels of contribution in the fund.

The increase in debt holding of China is in itself a boost in the US dollar but this has come as an unintended result. The US dollar has been in the past threatened by the arrival of the Euro. One of the proponents of the shift from the US dollar to the Euro was Iraq’s Sadam Hussain. He hailed the arrival of the Euro into the world markets and thought he could fix the Americans by driving a crusade among other Arab oil producers to abandon the dollar for the Euro.

Because China has actively been involved in keeping the American dollar sky high in the financial markets, that has helped to drive the manufacturing sector from the land of the green back to that of the Yuan. I wonder if China would apply the same strategy in running the new financial institution. I am not learned in the field of finance and economics but I have a very high level of understanding when it comes to governance and strategy. The possible scenario here is that China is going to buy off all the debt that third world countries are holding against the US supported financial institutions in the World Bank and IMF.  Such a strategy would in one way or another affect Africa and its development bank. Currently Egypt is the only country in Africa which is a member of the AIIB. The AIIB is equally a threat to the African Development Bank (ADB). African countries will begin to drag their feet in acquiring loans with ADB. One thing we can be certain of is that the Chinese are going to give their loans far below the normal lending rates in the world market. Of course they are going to make their profits from the overwhelming volumes of borrowers. But it’s a win-win situation for Africa.

China has already flooded the world market with money. This is by way of construction projects as they are spread around the world doing this and that infrastructural project. The National Bank of China has been generous in lending to Chinese construction companies who do work outside China and this has set in motion the right atmosphere for the AIIB. Indeed it is China’s turn to eat!

*Richard Moleofe is a Retired Military Officer (Distinguished Service Medal)